FECIF has tentatively welcomed the European initiative on the Pan European Personal Pension products (PEPP) as a solution cross-border retirement issues but only if issues surrounding taxation, advice and investment options can be rectified.
Retirement provision is a major issue facing all European countries, hit by a “combination of increasing life expectancy and lowering long-term interest rates”, according to Simon Colboc, member of FECIF Advisory Committee.
Individual pension provision “must be developed” and, Colboc points, FECIF members perceive this need with their clients across Europe, whether is it to offer more choice and competition in markets with a developed long-term savings offering or simply to give access to solutions in less developed ones.
“Unlocking this could have a tremendous effect on long-term savings and investments across Europe,” he said.
“We remain absolutely convinced that PEPP has great potential, but three elements are needed to make it work, and they are not yet solved by the current proposals.”
The PEPP initiative was launched by the European Commission mid-2017 and the European Parliament published what FECIF called “a very promising working document” earlier this year. Now, the European Council (representing individual countries) is looking at the project.
FECIF said that is pressing the importance of tax treatment as a priority that “must be addressed in innovative ways” by Brussels prior to PEPP roll-out.
“Tax treatment is critical to the success of a savings product,” Colboc said. “The main issue is how to give PEPP products the same tax treatment as favourable local pension products, without overstepping national tax rules.”
Current proposals either require 28 national compartments in every PEPP – or a very hypothetical 29th tax regime that would sit next to existing countries.
“Both these approaches are impractical and doomed to fail,” Colboc added. “A pragmatic solution could be for PEPP to offer only two compartments, which would dovetail with the majority of existing pension tax regimes: One ‘EET’ compartment where sums invested receive tax relief, build up tax-free and are taxed at exit, in line with many 2nd and 3rd Pillar pension funds in the majority of Member States; One ‘TEE’ compartment where sums are invested after tax, build up tax-free and are tax-free on exit, which is the case for a minority of Member States and for individual savings products often also used for retirement.”
This way, he points out, national authorities could more easily align the tax treatment of PEPP with their own national comparable Personal Pension Products, without needing to change local tax rules or to create compartments for each and every country.
“We believe it is important for PEPP to test some innovative, consumer-centric approach to avoid getting bogged down and adding extra layers of complexity to existing solutions,” he added.
Other debate around suitable (default) investments within PEPP and also onsumer information and the matter of whether investments should require advice or self-service.
“The matter of advice is not addressed in the working paper and little has been said about this subject in the ensuing debates,” FECIF added. “However, there seems to be a general view that beyond the basic default option, advice should be available, but not seen to be a priority for smaller contributors. FECIF regrets this, especially as there is no consensus as to what an advice-free default option should look like.”
The impact of national pension entitlements, varying decumulation options and retirement ages, particularly if the PEPP saver has cross-border accumulated benefits, “strengthens the need for the PEPP saver to receive appropriate advice,” Colboc said.
“As it stands, the PEPP project is at a crossroad. The (near) future will tell if it takes a step in the right direction, or on the road to nowhere.”